The Reserve Bank has lifted the cash rate to 4.85%, the highest level since the global financial crisis, and the vote was not unanimous. Six of nine board members backed the increase. Three wanted to hold. That split is the detail worth sitting with, because it tells you the board is weighing a slowing economy against inflation that refuses to settle.
Markets had priced the move in. The surprise is not the decision. It is the forecast that came with it.
Inflation is later than the bank hoped
The bank now expects inflation to stay elevated through much of 2027. It does not see the top of its 2-3% target band being reached until late 2027, roughly three quarters later than it previously forecast.
The current readings explain the caution:
- Headline inflation reached 4.3% over the year to September.
- Housing costs rose 5.2% over the same period.
- Underlying inflation held at 3.6%, with no improvement in six months.
No improvement in six months is the number that moved the majority. Five hikes in, the underlying measure has not budged.
From a cash rate move to your repayment
Variable-rate borrowers see higher repayments from mid-December. On a median Sydney home of $1,169,000, the increase is up to $154 a month. In Darwin, on a median of $630,000, it is $83.
That gap looks modest in isolation. It is not, because this is one step in a sequence. Each hike lands on a household that has already absorbed the last one, and the cumulative effect on borrowing capacity is larger than any single month’s figure suggests. Our guide to the RBA, interest rates and repayments walks through how to run the numbers on your own loan.
Key numbers
- Cash rate: 4.85%, highest since the financial crisis
- Board vote: 6 in favour, 3 for no change
- Headline inflation: 4.3% to September
- Underlying inflation: 3.6%
- Home values: down 4.3% since March, seven straight monthly falls
- Sydney median: $50,267 lower than at the March peak
Why falling prices do not cancel higher rates
Home values have slid 4.3% since March, seven consecutive monthly falls. In theory, cheaper homes ease the pressure. In practice, the two forces work on different people.
A lower price helps someone who has yet to buy and can still get a loan. It does nothing for an existing borrower whose repayment just rose. And a buyer’s borrowing capacity shrinks as rates climb, so the price fall can be offset by a smaller loan. We looked at that tension in why home price falls are being wiped out by rates.
For existing owners, the cushion is equity. Prices are lower, but many borrowers still hold substantial buffers, which we covered in our piece on the seventh monthly price fall and equity cushions.
Who runs out of room first
Commentary on this decision has split along predictable lines. One camp focuses on the rate itself and what it does to household budgets. Another argues the more telling question is how much slack borrowers have left after five increases.
That second question is the sharper one. Early in a tightening cycle, households draw on offset balances and savings. By the fifth hike, that buffer is thinner for many. Arrears remain low and the jobs market is resilient, so there is no evidence of widespread distress yet. But low arrears is a lagging measure. It tells you where borrowers were, not where they are heading.
The pressure will not land evenly. We set out why a fifth hike won’t hit all borrowers equally. Highly leveraged recent buyers, those rolling off low fixed rates and investors with thin yields are the groups to watch.
Investors carry a different squeeze
For investors, higher rates raise holding costs while price falls reduce the value of the asset. Rental income helps, but it rarely rises fast enough to close the gap in a sharp tightening. A yield that looked fine at lower rates can turn negative after five increases.
This cycle also differs from earlier ones in speed and in the starting point. Borrowers took on large loans when rates were low, so the same percentage rise is a bigger dollar hit than it would have been in a previous era.
What could derail this
The bank’s own forecasts carry risk in both directions.
- Inflation could prove stickier, prompting further increases.
- Growth could weaken faster than expected. One major lender’s economists project growth easing to 1% by mid-2027, from 1.8%.
- The downturn in prices could lengthen, which one industry economist expects.
- A jobs market that holds up would keep arrears contained and support the case for staying tight.
The three board members who wanted to hold clearly saw the second risk as more pressing. Their dissent is a signal, not a footnote.
What to watch before the December meeting
The last decision of the year is due 8 December. Between now and then, watch the monthly price data, any shift in underlying inflation and early signs of repayment stress. If you hold a variable loan, check your buffer now rather than when the higher repayment arrives. Our look at who actually benefits from rate rises shows why outright owners are the clear winners and leveraged borrowers the clear losers.
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General info, not financial advice.
